4th Quarter Equities
The stock market was cheered throughout most of the year by the economic news. The much-predicted recession never occurred, and the economy was healthy at the same time that inflation declined. The Federal Reserve was able to begin reducing interest rates. The potential of artificial intelligence gave a huge boost to the technology sector which lead the broader market advance.
The S&P 500 was ahead 2.41% in the fourth quarter and 25.02% for the full year. The dominance of technology was seen in the Nasdaq Composite which gained 6.35% in the fourth quarter and 29.57% for the year. The other indexes were positive but less robust. The Dow Jones was ahead 14.99% for the year and up a modest 0.93% in the last quarter. Similarly, the Russell 2000 index of small cap stocks was ahead 11.54% for the year and up 0.33% in the last quarter. Some of the slowdown in the fourth quarter reflects the concerns that we at Hudson Advisors are expressing for the 2025 year.
The Market: The positive stock outlook is also rooted in the upbeat projections for corporate earnings. In aggregate, S&P 500 companies are expected to report 14.8% earnings growth in 2025, an acceleration from 9.4% growth in 2024. The earnings are anticipated to be of high quality – driven by real revenues from accelerating sales growth. Tech companies will dominate – but earnings are expected to increase across every sector for the first time since 2018.
However, we have that issue of very rich stock prices. We think it useful to look at the cyclically adjusted price to earnings ratio (CAPE) developed by Yale Professor Rober Schiller – which looks historically. The S&P 500 currently has a CAPE ratio of 38. The ratio has been above 35 only 6% of the time since the S&P 500 was invented in 1957.
In effect we need those “perfect” market conditions to sustain and grow these stock prices. But we face the uncertainties of Federal Reserve actions and the policies of the new Presidential administration. At Hudson Advisors, we will be happy to see 3% to 5% growth in the S&P 500 in the year ahead. We will be wary in the current market environment and avoid stocks that trade at absurd valuations.
